Saturday, December 2, 2023

Weekly Preview: Earnings To Watch (AA, NFLX)

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Downbeat fourth quarter earnings result from some of the world’s largest banks such as JPMorgan Chase (JPM) and Citigroup (C) didn’t impede what has been a steady rise in stocks since the new year began. Instead, investors focused on fresh data on consumer sentiment and inflation expectations, which suggests that the economy remains in relatively good standing. But for how long will that pattern sustain itself?

Evidenced by week’s market performance, adding to risk is now the go-to strategy, especially at a time when inflationary pressures have begun to moderate. On Friday, the U.S. economic data for January showed that consumer sentiment index climbed to its highest level since May 2022. This comes at a time when expectations for the rate of inflation one year out moderated. There is now a firm belief that the Federal Reserve should begin cutting rates, not prolonging the rate increases.

For the week, the Dow Jones Industrial Average rose 1.8%, while the S&P 500 index added 2.4%. The tech-heavy Nasdaq Composite index was the clear winner with a gain of 4.5% for the week. This marked the second consecutive week that all three benchmarks were positive on a weekly basis. On Friday the Dow gained 112.64 points, or 0.33%, to close at 34,302.61. The leading gainers on the Dow were, among others, Apple (AAPL), Goldman Sachs (GS), Caterpillar (CAT) and American Express (AXP).

The S&P 500 Index, which was down at one point Friday, ended up 15.92 points, or 0.40%, to close at 3,999.09, while the tech-heavy Nasdaq Composite rose 78.05 points, or 0.71%, to close at 11,079.16. Investors have been looking for reasons to buy the lows the market, particularly oversold names within technology such as FAANG cohorts Amazon (AMZN), Apple, Meta Platforms (META) and Google parent Alphabet (GOOG , GOOGL), which have been ravaged by high interest rates.

One of the major catalysts for stocks were the big banks, which began reporting their Q4 results. They revealed that the recession might be mild, but it has not yet been entirely tamed. Going forward, the results of corporate earnings will take a major focus, driving stocks up or down. Entering the quarter, earnings estimates have been aggressively reduced, creating a low bar for companies to beat. Q4 earnings season kicks into high gear with results expected from technology heavyweight Netflix (NFLX). Can its earnings pull tech stocks out of the doldrums? Netflix is one of several names worth watching this week; here’s what to keep note of.

Alcoa (AA) – Reports after the close, Wednesday, Jan. 18

Wall Street expects Alcoa to report a loss of 73 cents per share on revenue of $2.67 billion. This compares to the year-ago quarter when earnings came to $2.50 per share on revenue of $3.34 billion.

What to watch: After a brutal 2022, shares of the aluminum giant have come roaring back, rising 28% in the past six months, while gaining 17% and 12% in the respective 30 days and five days. However, the company still has a long way to go. Currently trading at $54 per share, the stock is still 44% below its 52-week high of $98 per share. The decline in metal stocks have been driven by not only recession fears, but also excess inventory. Aluminum is used in a broad range of industrial and consumer end markets. However, Covid-related lockdowns in China has also impacted aluminum demand, particularly in the automotive sector, while also adding to supply chain disruptions. Analysts at Morgan Stanley believe these headwinds still remain. Citing downward pressure on the company’s profitability and potentially negative earnings revisions, analyst Carlos de Alba downgraded the stock to Equal Weight from Overweight, setting a $56 price target, reduced from $60. He sees material downside to consensus estimates for the current quarter and the entire fiscal year 2023. Back in November, Goldman Sachs analysts cited high expenses for the company, particularly raw material costs and energy costs. Essentially, this is another potential headwind for its profits. Alcoa on Wednesday must speak positively its profitability to get investors excited about the prospects of the aluminum industry and Alcoa stock in particular.

Netflix (NFLX) – Reports after the close, Thursday, Jan. 19

Wall Street expects Netflix to earn 44 cents per share on revenue of $7.82 billion. This compares to the year-ago quarter when earnings were $1.33 per share on $7.71 billion in revenue.

What to watch: Netflix stock has been one of the better performing names in large-cap tech, rising almost 90% in the past six months, besting not only the S&P 500 index, but also the Nasdaq 100 during that time span. With shares already up 15% in 2023, it appears the market has regained its confidence in the streaming giant. But is there still a buying opportunity? The company’s growth initiatives have begun to pay dividends. Not only is the company’s efforts to grow its ad-supported tier working, management has also implemented ways to crack down on password sharing. In its Q3 results, the company’s average revenue per membership (ARM) grew of 8% year over year, accelerating from 6% and 7% growth in the prior two quarters, respectively. Heading into the quarter, it’s possible that the ARM could be even stronger. Regarding the ad-supported tier, which was launched in twelve global markets in November, it exposes Netflix to an estimated $140 billion of brand advertising spending. Combined with the company’s upcoming content launches, there is a compelling case to remain invested in the stock. These assumptions will be answered when Netflix issues its guidance forecast for the next quarter and full year.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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